How to Profit from the 2020 US Presidential Election

Every leap year, presidential elections are held in the USA. The outcome of this process is unpredictable, judging by the frequent mistakes of analytical forecasts and the discrepancies between exit polls and the actual results of the popular vote. The uncertainty and lack of clarity in the choice of the head of state of the world's largest economy is reflected in all markets, including Forex, where the dollar plays the role of the main benchmark for the exchange rates of all currencies.

On November 3 of this year, US citizens must decide which of the two candidates will occupy the White House for the next four years: Joe Biden or Donald Trump. The choice of candidate determines the trends of the currency and stock markets, whose volatility at the moment the first vote-counting results are announced can bring large losses or profits.

The article collects the views of analysts, speculative bets on the candidates, highlights the peculiarities of elections in the USA and possible trading strategies.

In the final stage of the election race in the USA, there are always two candidates representing the two main political parties: the conservative Republican and the liberal Democratic.

Donald Trump was chosen as the Republican representative, ready to continue the political line pursued over four years for another term. Business may receive tax incentives, but the benefits are doubtful because of immigration restrictions, the deglobalization of the economy and trade wars.

Joe Biden as the Democratic candidate defends liberal values. He promised to return the country to UN programs and to continue Barack Obama's course toward the globalization of the economies of the Pacific region countries. Biden supervised this program for 8 years while serving as vice president from 2008 to 2016.

This fact of his tenure became one of the reasons why the Democratic Party nominated a 77-year-old candidate. Despite his age, Joe Biden should remind investors and business of the significant success in the economy achieved during Barack Obama's stay in the White House after the 2008 crisis.

However, Donald Trump is also a fairly elderly candidate. The president who promised to make America great and has now abandoned his old campaign slogan MAGA (Make America Great Again), turned 74.

There is one week left until the US presidential election, during which Forex traders who want to assess the chances of one candidate or another winning will be showered with many forecasts and exit polls. Despite the sufficient statistical literacy of these studies and the correct social targeting of the surveys, it is worth remembering several important paradoxical facts:

Hillary Clinton won the 2016 election by a margin of 3 million votes, but the majority of electors voted for Donald Trump. This is a college of 538 state representatives, and the number of electors is allocated in proportion to the population of each state.

They make the final decision on the election of the presidential candidate by a simple majority vote, already having the voting results of their states in hand. Electors are supposed to vote the same way as the majority of residents, but they are not obliged to do so. In 2012, they went against the will of the people in the selection of Barack Obama for a second term, and in 2016 they gave Donald Trump a chance.

Most states and their representatives traditionally and predictably vote for the candidate of one of the parties, without changing their "color" for many years. On the map of the USA, they are shown in blue (Democratic) and red (Republican). Purple colors are the swing states, and the votes of their electors determine the final outcome.

There is no single type of identity document in the USA; citizens have passports for traveling abroad, while everyone else uses driver's licenses. Poor sections of the population live without any documents at all; obtaining them is not considered mandatory and costs a certain amount of money.

The law requiring the mandatory presentation of identification at elections was passed under pressure from Republicans, while Democrats oppose such measures.

Citizens must vote for 435 candidates to the House of Representatives and choose 33 members of the Senate. During Trump's rule, Democratic control of the House of Representatives did not allow the president to pass laws, led to the longest budget lockdown in the USA, and left the country without a second package of economic aid.

The balance of power in Congress plays an important role when investors and speculators assess the results of the US presidential election. Democrats have a high chance of gaining control in both chambers, which will become a negative factor if Donald Trump wins.

Traditionally, the name of the new US president becomes known a few hours after the polls close, but this time everything may be different. Because of the coronavirus epidemic, most US citizens will choose the option of voting by mail.

Given the fact that in 2016, 21% of voters used this method, this year there will be many times more postal items. This may delay the vote count because of problems with the speed of mail delivery. Postmaster General Louis DeJoy optimized the service to such an extent that Congress had to allocate additional funding on an emergency basis.

Problems with a shortage of postal workers, boxes for receiving mail, and the closure of mail processing centers were discovered just before the election at the end of August. The agency is headed by a loyal supporter of Donald Trump and one of his direct donors.

The US president openly opposes voting by mail. A delay in sending ballots beyond the deadlines for their registration by election commissions will make these votes invalid. It is possible that the counting of such votes will drag on to the maximum deadlines or lead to scandals and court proceedings.

In the history of US elections, there has already been a moment when the battle between Republicans and Democrats for votes led to the final election results being decided in the Supreme Court. Republican candidate George W. Bush became president in December despite Democrat Albert Gore winning the popular vote.

At the time of writing this article, Joe Biden had gained 54% of the votes of respondents according to polls published in the American press. There is a clear increase in the Democratic candidate's lead over Donald Trump. However, bookmakers' odds, on the contrary, are beginning to rise on the victory of the incumbent president, although Biden remains the favorite.

The lead of the Democratic candidate is explained by the intensification of the election campaign, well financed in terms of holding various events and meetings. On the other hand, society and business are disappointed with the political and economic legacy of Donald Trump.

During his presidency, the coronavirus interrupted the longest phase of economic expansion in U.S. history and took 200 thousand lives, a global anti-record. By the time of the election campaign, the number of new cases was growing, the virus had reached the presidential couple as well, which negatively affected the rating.

At the same time, in China, with which Trump started a trade war, the number of cases is counted in dozens, and the economy coped with the consequences of the total quarantine, restoring GDP growth to 4.9% in the third quarter. China took advantage of the experience of fighting the Spanish flu by means of cruel measures of isolation of hundreds of millions of people, whereas in the U.S. they began lifting restrictions as early as May.

Despite the objective negativity, the final word will belong to those who come to the polling stations. As a rule, among them there is no majority of those respondents who actively participated in the results of the published polls.

A little more than half of U.S. citizens eligible to vote come to elections. In reality, only 20% of the votes cast in swing states will be decisive. Here the stability of the mass electorate of Donald Trump may prevail.

The incumbent president is steadily supported by residents of the hinterland, white Americans without higher education, whose opinion has not changed much under the influence of the above-mentioned economic and political factors. Judging by polls of Trump's supporters, he lost Michigan and Wisconsin, but received Florida and Pennsylvania in return.

The strength of Joe Biden is that a wide range of supporters vote for his candidacy: the democratic stratum of the working class, liberal businessmen, national minorities, dissatisfied Republicans, the urban middle class. This "diversity of faces" can become a weakness if:

This method was applied in the 2016 election against Hillary Clinton; now the first volley has already been fired at Biden, criticizing the business ties of his son. Trump does not hide that there will be another "deadly" shot.

Much more important than the support of swing states is the position of the electors. At the moment, Biden has 233 votes, Trump 188 thanks to the consistency of voting in many states. The incumbent president needs to gain 269 votes in order to remain in power. Then a "tie" will arise and the Republican-controlled Congress will add its vote "FOR."

The U.S. presidential candidate made his position on the main issues of current U.S. economic policy clear, and it can be characterized as a relaxation with respect to trade wars. Biden's globalization of the economy will replace Trump's policy of protectionism.

In this regard, the main beneficiaries of Biden's victory will be, first of all, the "affected" major and exotic currencies: the euro, the Canadian dollar, the Mexican peso, the Indian rupee, and the Brazilian real. Since early 2018, when Donald Trump began the practice of trade wars, the above-mentioned countries have been subjected to various sanctions to varying degrees, which affected the exchange rate of their national currencies.

On the chart it can be seen that the weakening of regional and major currencies stopped after the onset of the economic crisis associated with quarantine measures to counter the spread of the Covid-19 epidemic. Going forward, the proximity of the election only strengthened the growing trend, which will become a medium-term tendency with Democrat Joe Biden coming to the White House.

Trump's trade war was directed first of all against China, whose exchange rate is showing the most impressive rise. This trend is not connected with the election: China became the only developed country in the world to restore and raise its economic indicators to the pre-crisis level.

The arrival of Joe Biden will only reduce the degree of hostility, but will preserve the "cold war" regime with China. If we add to this the strong dependence of the yuan exchange rate on "party decisions," it becomes clear that it is not worth investing in this currency before the election. It is better to continue using the features of the USDCNY pair described in this article.

Turkey is another country that has been subjected to a number of sanctions and to this day remains under their threat. However, the Turkish lira is not worth buying; it is better to refrain from trading this exotic altogether. The reasons for this decision are obvious: a war on three fronts, the dependence of the Central Bank on the decisions of the country's president, and a conflict with NATO and the EU.

The British pound may also become a target for attacks from the U.S. if the Democrats come to power. The strength of the confrontation with Great Britain will depend on the authorities' position toward Northern Ireland. Joe Biden honors his Irish roots and supports political relations with the local authorities. If Great Britain adopts a law allowing it to impose restrictions on previously accepted obligations under Brexit, then it risks being left without a trade deal with the U.S.

A Democratic victory is considered a negative signal for the U.S. stock market. Unlike Republicans, the Democratic Party seeks the destruction of monopolies and higher taxes. Some politicians accuse Joe Biden of excessive sympathy for socialism. However, the reality of the statistics is such that investors' annual investments were five times more profitable under Democrats.

For example, the presidency of Barack Obama, during which Joe Biden served as vice president, coincided with the longest rise of the economy, although in percentage terms of S&P500 returns, first place belongs to Bill Clinton.

Among the five best stock market results, there are three Democrats and two Republicans. But among the worst index results, of which there have been only two in history, there are only Republicans.

Despite the current loss in exit polls by incumbent president Donald Trump to his opponent Joe Biden, the probability of a second term cannot be completely ruled out. Such a phenomenon would become another shock for the market, largely repeating the 2016 scenario.

Let us recall that at that moment stock indices fell by 4%, and the dollar index lost about one percent. Despite the weakening of the American currency, it strengthened sharply in pairs with exotics. Probably, this trend in November 2020 will be somewhat stronger, especially in the above-mentioned currencies: the peso, the real, the rupee, and so on.

The weakening against the major currencies will be just as temporary as it was in 2016, and the session will most likely end with the dollar rising.

A change in the presidential candidate always means a new economic policy for the country, although party affiliation determines its main features. Investors and speculators have an approximate idea of what to expect from Democrats or Republicans, which is what drives the reaction of the currency market in the coming months.

First of all, the election of a new president or the second term of the current head of state is reflected in the dollar. Judging by the DXY (USDX) index, the entry of a Democratic candidate into the White House will lead to a rise in the dollar in November against the major currencies, while the election of a Republican will lead to a November decline in the dollar.

As you can see, Donald Trump became an exception to the rule, however, not only at the time of the election. The Twitter diplomacy of the U.S. president and other unusual methods of governing the state have already become the subject of studying this phenomenon of political economy.

If we recall one more peculiarity of the U.S. election process, it is worth noting that the official assumption of office takes place only at the beginning of the new year. When a Democrat is elected master of the White House and the dollar falls in November, the president's inauguration led to a strong strengthening of DXY (USDX).

If we consider the situation for each specific pair, then first of all it is worth noting that the protective mechanism of the yen does not work during U.S. presidential elections. The currency, whose dynamics often diverge from the rest of the market, this time completely coincides with the November leap-year trends of DXY (USDX).  

A completely different matter is the USDCAD pair, which constantly shows November election growth, with the exception of Barack Obama's re-election in 2012. This can be explained by Canada's participation in the global Trans-Pacific Partnership (TPP) project.

Just in case, it is worth additionally emphasizing that the growth of USDCAD means a fall of the Canadian dollar amid the currency stress of elections in the neighboring country.

For all the unpredictability of U.S. presidential elections, the future movement of currency pairs can be forecast using standard approaches of technical and fundamental analysis. A week before the election, these factors argue in favor of a likely decline in the EURUSD pair during the week of the American vote.

Pay attention to the Open Interest (OI) positioning of EUUXO euro currency options. The maximum number of held Call contract positions is located at the 1.1800 mark. If by the time the options expire the euro rate is above 1.1850, the contract sellers will be at a loss.

Options are a type of insurance sold by large banks, which in 80% of cases do not allow the rate to rise beyond the maximum OI values. If the election caused concern among bankers, they would sell insurance across a wider price range, as happens with CAD contracts. As can be seen from the figure below, the current position of the CADUSD rate is almost exactly in the middle of the maximum Put and Call OI.

You can read more about the theory of trading by option levels in the article on our website. For now, it is enough to understand that a move into the 1.1850 area may be a likely level for a short or a take-profit for a long, if someone suddenly holds such a position.

Election statistics and a number of fundamental indicators also argue in favor of a possible rise in the dollar for the following reasons:

It is worth noting separately that the ECB's dissatisfaction with the strengthening of the dollar has already led to the formation of an extended flat zone capable of acting as resistance on the next growth wave. It turns out that a further rise in EURUSD makes a downward correction the most likely scenario from a technical point of view.

Buying gold before the election is an obvious but bad idea. The image of a safe-haven asset remains in the past; the precious metal has become a speculative instrument. One cannot rule out a repeat of the 2016 scenario, when strong growth turned into a nonstop decline until the end of the year.

The best option for traders is to stay out of the market at the time of the election, postponing the purchase of XAUUSD until the second half of November, when seasonality (the Christmas rally) may stimulate the growth of metals. Given the high probability of increased volatility, the nearest support capable of holding in case of a fall and becoming a reliable base for entering a long is at the 1800 level.

Some forex traders hedge currency trades by trading the S&P500 index, which is in correction at the time of writing. Probably, these losses will be offset in the week before the election under the influence of an abnormally high voter turnout at the early voting stage. According to the latest data, 17 million U.S. citizens have already cast their votes. According to polls, they supported Democrat Biden by a wide margin.

As early turnout increases, the S&P500 rate will rise right up to the debates on October 30. The current correction can be used to enter a position as soon as the price gap from the beginning of October is fully closed.

Growth before the election will allow you to build up a reserve of paper profit to wait out the election reaction. At the time of the election, the quotes of the index will be subject to strong volatility. Traders will react not only to the distribution of votes for the presidential candidacy, but also to the party affiliation of Congress.

Democratic control of both chambers may become negative news for the technology-heavy NASDAQ, which will drag the other indices down with it.

High volatility at the time the election results are announced may cause slippage in market orders and when stops are triggered, which will lead to a greater amount of losses than traders expect. Brokers will try to avoid possible client negative-balance situations by increasing margin requirements and limiting leverage on a number of currency pairs, especially exotics.

At the end of October, keep a close eye on email newsletters and news in the terminal so that you can adjust the money management of your positions in time. Traders who trade intraday should be prepared for problems with the fast sending of orders to the market, including on ECN-accounts, and for possible freezing of terminals.

In terms of the force of news, U.S. elections are comparable only to a radical change in the monetary policy of the Fed. The event takes place once every four years, but that is no reason to "trade at any cost." A trader should weigh risk against profit for themselves.

This balance will differ from the standpoint of strategies. The elections pose the greatest risk for intraday trading: you need to calculate the size of stops and take-profits correctly and be prepared for "off-the-charts" readings from indicators.

Range expansion is dangerous for grid traders and Martingale strategies with an excessive number of legs opened by advisors. Manual intraday trading on election day will turn into a colossal emotional burden capable of leading to mistakes and unforeseen losses.

It may be worth conducting an audit and closing a number of profitable medium-term and long-term positions. Currency quotes will be "flying" in all directions and may hit a stop-loss before the take-profit, leaving the trader without a favorable position. Another option for pre-election readiness is to move the stop up to the breakeven level.

It is important to remember that elections are only an episode in a large economic cycle that does not depend on the individual candidate for U.S. president. Globally, the stock market will continue to rise after coping with the negativity of the second wave of coronavirus, but the weakening of the dollar may drag on because of the lost advantage in interest rates.

P.S. The exit poll results in our VKontakte and Telegram communities:

Best regards, Ivan Petrov
Tlap.io